Edited transcript from Syndication Attorneys, PLLC’s teleseminar ‘5 Things You Can Do in Your Downtime to Further Your Syndication Business’
Originally broadcast on April 23, 2020
Kim Lisa Taylor:
Good morning, everybody — or afternoon, depending on where you are. Welcome to Syndication Attorneys, PLLC’s free monthly teleseminar, where we talk about topics of interest to real estate syndicators, with the opportunity for live questions and answers at the end of the call. I am attorney Kim Lisa Taylor. Also joining me on the call is Charlene Standridge, our law clerk and Business Development Director.
Before we get started, please know that all of our calls will be recorded and may be used for a future promotion, posted on our website, or broadcast in a podcast available to the public. If you don’t wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call. And you can do that at our website, syndicationattorneys.com. Information discussed during this free teleconference is of a general educational nature and should not be construed as legal advice.
This is an audio-only conference. We tried to do a video conference a couple of weeks ago and because of all the people using bandwidth from home, trying to do video calls, it got a little squirrelly so we decided we would just keep doing the audio for the time being. Eventually we’d like to go to video.
Today, our topic is “5 Things You Can Do in Your Downtime to Further Your Syndication Business.” First, I want to talk a little bit about the state of the market. I’ve been following this, and I’m sure a lot of you have been following it as well. From what I’ve read and what I’ve been hearing from my clients, from investors, and from lenders and other vendors in this market, maybe I have a little different pulse on it, than some of the things that you have available to you.
Right now, we’ve got this perfect storm: Sellers aren’t selling, lenders aren’t lending, and investors aren’t investing. It’s a temporary situation, I’m sure. Because all of these people need to get back into business, just like all of us need to get back into business. So eventually, this will change. And out of this change, we are very hopeful that there will be some huge opportunities, and we’ve seen that in the past ,so I’m very hopeful that this is going to be the state of what’s going to happen now.
This is just giving you an idea of what I’ve been hearing: Required reserves have increased from lenders. From the lenders’ perspective, Fannie Mae- and Freddie Mac-backed lenders are requiring six to 18 months debt service payments in reserve at closing prior to funding your deals. So this is going to increase the amount of your raise. And you’re going to want to know what that number is, so you’re going to work with your lender on what they’re going to specifically require. They have told me that it’s based on debt service coverage ratios. The better your debt service coverage ratio is, the less they’re going to require in reserves. In some cases, depending again on the deal, they may actually release those reserves within a few months, so you won’t have to keep them forever.
But just right now, realize you may have to raise a little bit more money than you planned on in the past, which is a challenge because the deals were already really skinny, even before the coronavirus hit, and now we’re trying to work through how we can keep deals going during this time and they’ve just made it a little bit harder to do that.
Additionally, lenders are looking to lower their loan-to-value ratio. So they’re just trying to reduce their risk. They’re looking ahead, they’re listening to the news, just like we are. Everybody is saying, “Oh, gosh, this could come back again in the fall.” I think everyone is just waiting to see what happens in the fall. And then depending on how that’s handled, is going to determine whether or not these standards start to loosen up again. But for right now, and through the fall, and maybe through the end of the year, we’re stuck with what we have.
The good part about that, I guess, the upside is that sellers may have to reduce their prices at some point if they need to sell. They’re getting squeezed just like everybody else. They’ve got tenants who aren’t paying and if they wait too long, then you’re going to be able to look at their, this year’s rent income versus last year’s rent income and the lenders are always going to be looking at that, too. So all of a sudden, their properties aren’t going to look as good next year, as they might right now. In some cases, they may be smarter just to take a little loss now instead of a big loss later if they’re thinking about selling or if they need to sell.
Hopefully, that will turn into some opportunity. But right now, there’s not a lot of fluctuation in the sales prices, at least that’s what I’ve been hearing. The sellers are just waiting for the situation to stabilize and they haven’t started making their price adjustments. Another thing that we’re noticing and we’re hearing, is that the pool of ready investors has been diminished by stock market declines.
A lot of times you’ll have investors that have their money in the stock market, when they find a good deal in real estate, then they’ll pull some of those funds out and they’ll go ahead and make the investment with you. Well, if they had money in the stock market, when the stock market declined, then they’re all waiting and hopeful that those declines will creep back up. The last time I looked, we’d only recovered about 25% of that decline. So they’re waiting to see if the other 75% is going to come back before they’re going to take their money out of the stock market.
What that means for you is that if you have investors who are normally in that situation, they’re probably just not interested in doing anything right now. That means you’re really looking at investors who have cash in the bank, in savings, or have just sold something or they are have self-directed IRA money that they haven’t invested yet. So if you’re doing any marketing efforts through this timeframe, then you want to make sure that you’re looking closely at those investors, but more importantly, you’re finding out from your investors where their money is, and what their situation is, to know whether or not they’re even interested in investing right now or if they need to wait a while. So just be aware of that. You’ve got a diminished investor pool, you’ve got more money you need to raise from investors, in order to get the loan. It’s just creating a little bit of a mess right now.
The upside of all that is that after the economy recovers, it is anticipated that those who rode out the stock market decline are going to be interested in maybe some more stable environment. They may be looking at investments in real estate, as something that’s going to hedge against these kinds of fluctuations in the future. And they may be very interested in pulling more money out of the stock market than they have before, or that they’ve invested in real estate before, just to get that stability.
I was just reading an article from on globest.com that was citing some survey that was conducted by the National Multifamily Housing Council (NMHC). They recently conducted a quarterly survey of apartment market conditions, that were tracking key indices. And I’ll tell you what the indices are, but before we go into that, I just want to point out that these are results they’re comparing last quarter to this quarter. And just bear in mind as you hear these numbers, that for all of the key indices, the break-even point is 50.
So for market tightness, that was one of the indices that they measured last quarter, at the end of last year, it was 48 — barely at the break-even point. And it has dropped to 12, according to their survey. They surveyed owners and operators of multifamily properties around the country and they’re a huge organization so they have a very large membership.
Market tightness went from 48 to 12. Sales volume went from 43 to 6. Equity financing went from 61 to 13. And debt financing went from 68 to 20. So it’s a tough market right now, but it’s not the end of the world. We just all have to ride it out, and we have to be hopeful that the market will recover in some fashion that will still make it profitable for all of you to invest in real estate, to syndicate real estate, and to still make your fortunes in real estate as you’ve been planning to all along. We’ve just got to take a little pause.
So what can you do during this time that can actually propel you forward when this all starts to normalize? That’s what I want to focus on. This is a really fantastic time to work on your investor marketing plan. And what are the key elements of an investor marketing plan? First, you have to determine how you’re going to meet investors. The second key point is how you’re going to make a lasting impression. And the third key point is how are you going to maintain your relationships. You’ve got to hit those three things. And you’ve got to do it consistently, all the time.
I don’t know how many of you have a drawer or a shoebox full of business cards for all the people you’ve met at all these different conferences that you’ve been at. This is the time to get those out, dust them off, and smile and dial. You’ve just got to smile and dial. You’ve got to call people, and this is a perfect time to call people actually because first of all, everybody’s bored at home just like you, and some of them are just desperate to talk to an adult human being.
So get on the phone, swallow, make the call, just say, “Hey, I met you at such and such, just wanted to check in, see how you’re doing. Hope you’re healthy…” And find out, just genuinely care about how they’re doing and how they’ve been affected by the coronavirus and talk to them about what are their investing plans and where are they at with that right now? Where’s their money right now, find out if it’s in the stock market. Find out if it’s in a self-directed IRA or if it’s in savings. And just start taking notes and keeping records of those calls.
That’s going to be critically important. It’s going to seem to your investors like you care about them, which you really should. And they’re going to be interested in what you’re doing, too. That’s going to give you the natural opening to be able to talk to them about what you’re working on and what you see in the market, maybe sharing some of the information you heard here today and just talking to them about what you see happening in your syndication plans, but in the market in general and how that might be helpful for them. They’re going to want to know that stuff, too.
So how will you meet investors? Well, we have to think a little bit creatively here. Because you can’t go to the face-to-face meetings that we’ve been able to go to in the past. The first step is really just getting on the phone with people. But you can do other things … you can invite all of those same people, the list of contacts that you have, you can invite them to an educational event, or something like that, where you’re giving them the same information that we’re giving you and educating them. But you’ve got to be able to figure out how to get digitally face-to-face with people or over the phone face-to-face with people during this time. And there are chances to do that.
Your next step of deciding how you will make a lasting impression is all about having professional marketing materials, starting with a website, things you can send to people in the mail or send to them digitally, that portray your company in a professional manner. So it’s best that you get some professional help with that. As some of you know, we have investormarketingmaterials.com where we have a team of professional editors and graphic designers that can help prepare those kinds of marketing materials. But you have time on your hands right now; you can start working on these things on your own.
And even if it’s just putting down a bullet list of something that you want to talk about, you want to do a brochure, you want to do a pitch deck, this is a great time to learn about how to do those things, and to start working on them on your own and then when you get to a certain point then you can either hire us to help you write it if you don’t feel confident in doing it yourself, or you can hire us to help you review it just to make sure that it does meet the kinds of information that investors want to hear, and it also complies with securities laws.
So think about what kind of marketing materials you’ll need. If you want to know what marketing materials you need, do go to investormarketingmaterials.com and look at the products that we have there and read the descriptions because that’s going to help you understand the purpose of these kinds of documents and what you should be preparing and focusing on. And we’re happy to have initial 30-minute consultations with any of you for free. We’ve got some time on our hands right now, too. So we’re happy to talk to people and try to help you guys stay alive through this.
The third point of your marketing plan is deciding how to maintain your relationships. This is about creating some long-term contact newsletter, drip system, ongoing education that you do. I mean, this is why we do free monthly teleseminars. This is our chance to get out in front of each of you, and to talk to you about what we’re doing and how you can further your business and your investors will appreciate it if you do the same thing for them. So think about all of that and how you can implement that, and this is the time to really get working on that stuff.
So, create an investor marketing plan was number one. That was the first of the five things. The second one is work on your marketing materials. The third thing is really developing these investor relationships, and we’ve already talked about that a little bit. If you don’t have that bunch of business cards in a drawer or a file somewhere or in a shoebox, start by making a list of everybody you know, and don’t prejudge whether you think they have money or not, because you have no idea what they have, whether they just inherited something, won the lottery, or they’re a trust fund person. Unless you’ve actually had a conversation with somebody about their finances and their sources of funds, you don’t know. Just assume that everybody has an ability, and you want to be able to talk to them about that.
Make a list of everyone you know, with their name, their phone, their email address, and put it in some customer relations management program. You can start with an Excel spreadsheet. It doesn’t have to be fancy, but it’s got to be something where you can keep notes and where you can have all their contact information in place, you can record when you talk to somebody about what and who was on the phone, and what their answers to your questions were and what they asked about your company, just to keep that fresh in your mind, so when you have a follow-up conversation with them, then you can refer back to that.
There are some free customer relations management programs out there. We used to use Insightly, a Google app. That I believe is free. It used to be free for two people. There are some other programs out there that are also free for a couple of people. And then when you get to a place where you need more advanced stuff and record-keeping systems, then they’ll sell you a subscription. But do call people, start calling people now and talking to them about what they’re doing, what you’re doing, and let them know what your plans are to ride this out. And how do you see this happening in the future, and they will be appreciative, I’m sure.
The fourth thing you need to do is take this time to educate yourself. You’ve got downtime, instead of just watching TV all the time, and taking too many walks with your dog — who like really just wants you to stop — you can read. Read my book, “How to Legally Raise Private Money.” If you haven’t read that yet, you can get a free digital copy of that at our website, just go to syndicationattorneys.com, there’s a tab there that says “Get the Book.” You can get that today and start reading it. Or if you want to get it on Amazon, then you can get the Kindle version or the soft copy. We do have an audible book version coming and this is on my list of things to do right now, is to review the audible that’s already been recorded and they get that posted and applied. That’s still a couple of months away, so you may not want to wait for that.
Read books about developing investor relationships. There are some good ones out there and there are some that are a little unorthodox. There’s one called “How to Marry the Rich.” If you look it up on Amazon, the author has also got some books about how to do business with the rich and it’s really about knowing what to say, what they’re looking for. And also just getting in the right place at the right time and knowing what that place is and how to get there. So you can read those kinds of books; those are super important.
And then we’ve got a ton of articles and frequently asked questions on our website. And then also, if you’re new to these teleseminars, we’ve been doing them now for over three years, and we post every one of them to our website. So there’s a whole bunch of teleseminars out there that you can listen to, and they’re all less than an hour long or around an hour long at the most. So you can keep those going. We also have some audio on our website that’s fairly recent, that’s just little, 30 to 90 seconds. There are three-minute clips of just some definitions related to security. So you can listen to that stuff, too. Listen and learn, educate yourself, listen to podcasts. There’s a whole bunch of real estate podcasts out there and real estate investing podcasts. You might find some new ones that you like.
Then the last thing is, you can set up a fund. If you feel brave enough, if you’ve got some experience, if you’ve got some people with some experience on your team, then this is a good time to think about setting up a fund and having it ready to go, so as soon as the market shifts a little bit and you think that investors are ready to start investing, then you can start funding that and then you’re going to be ready to pull the trigger as soon as those deals start to loosen up and become a little bit more available.
Setting up a fund takes a little bit longer than setting up a specified offering. Usually setting up documents for a specified offering take two to four weeks. A lot of that depends on you. But setting up a fund can easily take 30 to 60 days, depending on how long it takes you to review everything we create for you. But this is a good time. And for all of our funds, we like our clients to have an investment summary — that’s a marketing piece that’s attached to the legal documents that we create.
And if you read about the investment summary at investormarketingmaterials.com, you’ll see what that entails, but you can start out by creating that first, and then once that’s created, then we can go ahead and start drafting the legal documents. Or if you want to hire us to do it, then we can do both at the same time. But this is something that you can work on in your spare time as well. If anybody is interested, we do have an article on how to write an investment summary for a blind pool offering, we’d be happy to share that with you if you want to take your first stab at it. And then we can help you when it gets to reviewing it.
So in conclusion, there is hope. The opportunities will return. We will come out of this, and we will recover. And this business has been going on for a very long time. Syndication business is not going to go away. And in fact, there’s actually some news on the horizon that I think you’ll find very interesting. And that is that the SEC … the timing was crazy with this … but in March, the SEC proposed raising the Regulation Crowdfunding limits from $1 million to $5 million.
So you may not know that Regulation Crowdfunding was part of the JOBS Act, and it originally allowed you to raise up to $2,000 from anyone. So more sophistication. It could be anybody. They don’t have to have any financial sophistication. And then there were some limits on how much accredited investors could invest and things like that. But the hallmark of it was that you could post your deal on a Regulation Crowdfunding platform, and then you could send people to that platform to see your deals, and then anybody could invest.
So it might loosen up some things for some of you. We’ve had certainly a number of calls with potential clients who are interested in raising money from people who are not sophisticated and not accredited. It’s going to open up the world of investors a little bit. The SEC has proposed changing the limit on how much you could raise from a million dollars in a 12-month period to $5 million in a 12-month period. So that’s the upside. If this proposal gets passed — and it’s still pending — then there will be the opportunity to raise up to $5 million that you can post on a crowdfunding portal.
The downside is, there’s going to be some financial requirements. Once you start raising over a certain dollar amount, you may have to audit your offering. And that could be a $20,000- or $30,000-a-year expense. So you’re going to have to weigh the pros and cons of being able to raise money from anybody, versus having to do some more onerous financial reporting that wouldn’t be required under a Reg D, Rule 506(b) offering. So anyway, we will have some opportunities for you to work with us on those kinds of offerings in the future and we’ll keep you abreast of how those regs are going.
So all in all, there is hope. The SEC actually has a small business capital formation division, they’re trying to work with investors to figure out ways to make it easier for them to raise money outside of the traditional stock and bond markets and outside of tradition broker-dealers. So some of those may be beneficial to you. And then the real estate market will recover eventually; it always does. And it always comes back better than it was before. It just takes a while for it to go through that cycle. We’ve all been expecting it and anticipating it for a while, maybe this is a good thing.
So don’t despair. Start working on your marketing materials, start calling your investors and get yourself ready because the opportunities will come and the clients of ours that actually bought properties after the Great Recession of 2007 to 2009 did extremely well when they sold their properties three to seven years later. They did very well for themselves and for their investors. We’ve seen many of our clients just excel, who happened to buy during those timeframes.
Now I want to open this up to questions and answers. We’re here for you, if you want to ask a question. Charlene, can you tell people how they can go ahead and do that?
If you want to ask a question you can either raise your hand on your dashboard of your GoToWebinar control or you can type it in, in the questions area, and I will read it and Kim will answer it.
Kim Lisa Taylor:
Great. In case you want to contact us for any reason, you can go to syndicationattorneys.com. If you want to get the book, there is a link at syndicationattorneys.com, where you can get the book. The articles and the teleseminars I was talking about are in the library at syndicationattorneys.com and you can also schedule a free 30-minute consultation at the website. So that’s probably the easiest way to contact us and if you need to call and you want to call directly, our number is 844-SYNDIC8. That’s 844-796-3428. Charlene, go ahead, and do we have some questions?
Here we go: “Where can we find good market data on price trends right now for multifamily?”
Kim Lisa Taylor:
I’m probably not the best source of information for that, because we’re more dealing with the raising-capital side. If you have real estate trainers that you’re following, then they would be the people who would be able to best answer those questions. But certainly any of the real estate trainers who are out there are probably publishing information about that. There’s David Lindahl, there’s Jake & Gino, there’s Vinney Chopra, Rod Khleif. There are podcasts all over the place. I’m sure they’re going to be having a lot of information about that out there as well.
CoStar is going to be good. LoopNet, I think that was purchased by CoStar, maybe … LoopNet, CoStar, they’re probably going to be publishing some information about that as well. But also the National Multifamily Housing Council is going to be a source for you. And GlobeSt.com, because they do keep abreast of that stuff.
Next question: “I saw your post about working with foreign investors. Can you elaborate on that?”
Kim Lisa Taylor:
Sure. If you’re working with a Non-U.S. Person … so first of all, you need to understand what a Non-U.S. Person is. According to the SEC, a Non-U.S. Person is somebody who is not a U.S. citizen, not a legal resident, and not living in the U.S. There’s another caveat to that, and that is that they also need to be wiring their funds from an offshore account. Because if they’re wiring their funds from an account that’s here in the U.S., then they are going to be treated like a U.S. person. So understand that those are the four requirements: Not a citizen, not a legal resident, not living in the U.S., and wiring their funds from an offshore account.
If your investors meet all of those criteria, then you don’t have to use the Regulation D, Rule 506 exemption or the Regulation Crowdfunding exemption or any of these other exemptions; you can actually use a different exemption that’s specifically for Non-U.S. persons, called Regulation S. Regulation S does not have any financial qualifications for investors, but you cannot concurrently advertise an offering in the U.S.
For instance, you could combine a Regulation D, Rule 50 (b) offering with a Regulation S offering, because the Regulation D, Rule 506(b) offering can’t be advertised. So since it can’t be advertised in the U.S., well, then you could have the two of them running side-by-side … people — U.S. and non-U.S. investors — investing both in the same company. We would have a different subscription agreement for the Non-U.S. Persons and the U.S. persons; you will have to withhold taxes on any Non-U.S. Persons and send them to the IRS, very similar to a payroll tax. And then that person can obtain their own U.S. Taxpayer Identification Number and apply for a refund if one is due and that’s always dependent on the tax treaty between the U.S. and their country.
So those are some of the things to know. If you’re doing a Regulation D, Rule 506(c) offering, then you would have to have a separate set of offering documents for your Regulation S investors and for your Rule 506(c) offering because the 506(c) offering is being advertised in the U.S. There is a table on our website that describes the difference between these two types of offerings. You can look for that in our articles or in our FAQs. I can’t remember which one we posted it in. But if you can’t find it, let us know and we’ll be happy to send that to you.
So Regulation S is for Non-U.S. investors, just can’t be advertised concurrent with a U.S.-advertised offering. Also, if you’re doing a Rule 506(c) offering that allows you to only bring in verified accredited investors, then you’re probably going to also be restricted to having verified accredited investors from your Non-U.S. pool as well.
Next question: “How onerous are crowdfunding oversight rules likely to be?”
Kim Lisa Taylor:
Well, they’re pretty onerous. The crowdfunding portal can’t advertise your specific offerings. I don’t know if any of you are familiar with CrowdStreet, but when CrowdStreet has somebody post an offering on their site, they will actually help promote that offering to their database of investors. And that’s one of the benefits that the people who post on CrowdStreet’s website get, is that they get this extra boost of investors coming from CrowdStreet’s investors versus just their own.
When you’re using a Regulation Crowdfunding offering, and you’re posting it on a portal, the portal is actually prohibited from singling out your offering and sending it in and trying to promote it to their database. They are restricted to only promoting the portal. So they can promote the portal out and try to gather a database of their own investors and let them know, “Hey, there’s new offerings on the site. And we encourage you to come visit often,” stuff like that, but they can’t single yours out.
So if you want to, you can funnel people through the portal on your own. You’re still going to have to engage in your own marketing effort for a Regulation Crowdfunding offering, if you want it to be successful. You aren’t going to be able to just rely on that crowdfunding portal to be able to raise all that money for you. And you also have to realize that your deal is going to be posted right alongside everybody else’s, so there’s going to be some competition there. So you’re going to have to find deals that are good enough or that have some unique selling proposition that you can make yours distinguished from the others. Think of a crowdfunding portal like a Multiple Listing Service for real estate.
On a Multiple Listing Service, they’re not promoting specific properties, they’re just posting information in a consistent format about those properties, where everybody, every potential buyer, can go and look at those and make those deals. This is really the same thing; it’s an opportunity for you to post it in an online format, but it’s not going to be a panacea for helping you raise all the money you can possibly want for your offering. And when you go to a Regulation Crowdfunding site like Wefunder, for instance, they have a whole lot of startup companies there.
So it’s different because you can pick and choose through those startup companies which ones you want, and which ones seem interesting to you, depending on what they’re doing, or what product that they’re doing. But if you’re going to be side-by-side on a real estate investing platform, then you’ve got to think about how to make yourself unique. One of the ways you can make yourself unique is to have some benevolent purpose, so that a certain percentage of the proceeds is going to go to a charity, or some cause, or something. Because even though your returns might be exactly like somebody else’s returns, investors can see that all day long, but all of a sudden, they’re like, “Oh, but I’m also helping abused dogs. That’s cool, I would like to do that.”
And so think about how you can uniquely position yourself. And you don’t have to be a nonprofit to do it. But you do have to probably give up a little bit of your management earnings to go toward something that would make you a little bit more unique. Or if you’re investing in green buildings or something like that … you’re just going to have to get creative. And that’s one of the things that we’ll help you with, is try to help you figure out what is your unique selling proposition, and how does that make you different than everybody else? So even if the returns are side-by-side, what’s the difference?
You’re also going to have to have some experience. I think people are always looking for experienced people. So if you don’t already have experience on your team, with the thing that you’re offering to investors right now, then you’re going to want to bring some people in, at least for your initial deals, and so you’d gain that experience. That always helps raise money.
Next question: “Is how to write an investment summary on the website?” And it looks like we’ve got a couple of people asking the same question.
Kim Lisa Taylor:
I don’t think it is. So if you want it, just email email@example.com, and then we’ll get that to you.
Next question: “Somewhat unrelated but, are you also well-versed in setting up a DST or raising money for a DST?” That’s a Delaware Statutory Trust in full.
Kim Lisa Taylor:
No, we don’t raise money for any of our clients’ offerings. We’re giving you the legal and marketing tools that you need to be able to go out and raise the money on your own. The second part of that is, are we well-versed in doing them? We have not done them. I certainly can. I know how; I know how they’re structured. We have not done them and the reason is because they really don’t work for multifamily.
On our website, there is an article called “The 1031 Dilemma.” And it explains the difference between TICs, 1031 investments and syndicates. And I think you should read that if you’re interested in doing them, because there’s something called the “Seven Deadly Sins of a Delaware Statutory Trust,” you can look that up online. It’s also in the article that you can’t refinance the project. You can’t negotiate leases.
You’ll appoint a trustee who would run the company and then there are beneficial owners of that trust who are the investors. But the investors cannot, and nor can the trust, be involved in certain things that are everyday things you have to do on a multifamily property. So the structures get very complex. You end up having to basically lease the property to somebody who’s going to be making those decisions and then it becomes hard for them to get a loan.
So anyway, it doesn’t work very well for multifamily. It works fantastic for triple net properties, so if you’re investing in triple net properties that don’t require a lot of involvement and financing from the group that organized the investment, then that would work really well.
Next question: “For new investors, what are going to be the key steps for appearing credible to investors once the market starts presenting opportunities again?”
Kim Lisa Taylor:
This is where you have to have done your legwork. We’ve told people for years and years, “You have to develop professional marketing materials.” The reason we created investormarketingmaterials.com is because we couldn’t find anybody that could do it the way we thought it needed to be done. They were either too slow, too expensive, or not able to create the products that we thought were necessary. So that’s why we hired our own professional editors and graphic designers to do it.
So that’s mainly the thing, is getting your stuff professionally edited, professionally designed so that it stacks up with the marketing materials that are sent out by hedge funds and giant syndication firms. We realized that all of the accredited investors you know, their names have been sold on the list to somebody. And so they’re probably getting bombarded with this stuff on a regular basis. So you just really have to put some effort into making sure that it’s well written, and it looks good, and it has the right information in it.
Next question: “Please speak to the best practices for dealing with investors’ dividends in light of the assets, having lower rent collections … what are you seeing?”
Kim Lisa Taylor:
Well, I know that early on, a lot of our clients just told all their investors, “We’re suspending distributions for now. And we won’t be making any into the near future until we know… We’ve got to keep some money in reserves.” Because you still have to keep the doors open, and you still have to pay your utility bills and things like that and your regular maintenance in order to keep the property going. So just let all your investors know that, “Look, for the time being, we’re suspending distributions; it’s to protect you, as much as anything else. We’re putting the money in reserves and if things loosen up in the future and we recover some of that money, then we’ll certainly be re-evaluating distributions at that time.”
Reserves are everything right now. I’ve even had some people discuss possibly doing capital calls. If you don’t need to, this isn’t the best time to do it. But if you do have to do it, if you’re all of a sudden to the point that you can’t make your mortgage, you may have to consider that and asking your investors to put in a little bit more money. All the documents that we write have provisions for you to do that in some fashion or another.
Then also start talking to your lender. Some of your government-backed loans, I understand, are actually deferring a couple of months of payments and doing some modification where it’s added to the end. If you have a commercial mortgage-backed securities (CMBS) loan or a hard money loan, you’re just going to have to start negotiating with them on what you can do. When all this started happening and we heard of the governors starting to make it illegal to evict tenants, which gave the tenants carte blanche to just not pay the rent, even if they had the money, I urged all of my senators and government representatives to make sure that also carried on into the commercial mortgage market. That they were also required to defer those payments and do some modification where it wouldn’t be too onerous for the commercial property owners to be able to continue after that deferral period.
So just be careful. Some banks will offer a deferral, but in order to reinstate your loan and start making your mortgage payments again, you would actually have to make up the deficiency all at once, which really isn’t helpful because you didn’t get rent 15 months from your tenants, and then now all of a sudden in order to reinstate your loan, you took advantage of their deferral program, and now to reinstate the loan, you got to pay it all back. How are you going to do that unless all of a sudden you’ve got a big check from somebody and that’s not probably what’s going to happen. So that’s where we’re at with that.
Next question: “Can you share the link here for comparison between 506(c) and 506(b)?”
Kim Lisa Taylor:
Just to make sure that you all understand the terminology, Regulation D is the regulation. And then the rules that we operate under, are rules 506(b) and 506(c). So you want to know the difference between Rule 506(b) and Rule 506(c), please go to our website in the Library. So if you look in the Library, you’ll get a picture of a bunch of thumbnails that have 506 articles listed. But down at the bottom, it says “View All.” So you need to go to “View All” and then you’ll see all the other articles that are posted there. And there’s a lot of them.
So there is an article there called, “Rule 506(b) versus 506 (c) — What’s the Difference?” I would encourage you to read the article. I would encourage all of you to also, when you’re there, read the article that’s called “Determining Investor Suitability.” It’s the first article that comes up. I think everybody should read that and especially now if you’re going to start a campaign where you’re going to go out and you’re starting to call all the people that you know, there’s some investor suitability requirements that you should already have an understanding of before you start making offers to investors. And that’s explained in that article.
It’s a two-page article, but it also has a link to some couple of those questions that you might start asking these investors while you’re on the phone with them. And then you’re going to record all that information in your Excel spreadsheet or in your customer relationship management software.
Next question: “You spoke on the $5 million in a 12-month period; you said it hasn’t been passed yet. Can you go over that one more time?”
Kim Lisa Taylor:
I’ll be writing an article about this probably in the next week. But if you want to look up Regulation Crowdfunding, you can actually go to the SEC’s website and look up Regulation Crowdfunding. And you’ll see what the original rules were, that they allowed a million dollars in a 12-month period, but there are some financial reporting requirements that kick in after you’ve raised a certain dollar amount. Now the SEC has some proposed regulations to raise that $1 million limit per year to a $5 million limit per year.
I’ll be writing an article about what all the differences are and comparing one to other within the next week or so. And we’ll give you a nice comparison of all of that. But again, realize that it could actually increase your costs. Think of it this way, everybody thinks, “Oh, well, if I do this Regulation Crowdfunding offering, you don’t have to have a private placement memorandum anymore; you do something else, that’s called a Form C.” And the Form C is like a streamlined mini PPM.
There are still some costs associated with generating that and making sure it has all the right information that the SEC requires. You’re still going to have to have your company and your operating agreement set up so that you have the right structure with your investors. And you’re still going to need a subscription agreement. So the only thing that’s different is that we’re doing a Form C instead of a PPM, and then you’re allowed to post it on a website, where they aren’t allowed to promote your deal, but they’re allowed to promote the portal, and you’re allowed to drive people to your deal on the portal. So it’s somewhat helpful.
The reason I’m saying that in the long run it could cost you more, is because if you’re raising over a certain dollar amount, then you have to audit your financials annually. And you’re going to have a lot, a lot of investors if your people are investing $2,000 at a time, and the audit costs can be pretty onerous. The SEC has estimated the audit costs to be $20,000 to $30,000 per year. Whereas if you were doing a Reg D, Rule 506(b) or a 506(c) offering, you’re looking at an initial cost of $15,000 to $20,000 to set up your initial documents, but now you’re not required to do these annual audits. OK? So if you’re not doing the annual audits, you don’t have those ongoing costs like you will with this Regulation Crowdfunding offering. So just be aware there’s going to be a trade-off in costs now versus costs later and you’re just going to have to make the decisions and that’s something that we’ll be able to help you with in the future.
Next question: “Can you mention the Seven Deadly Sins of a DST?”
Kim Lisa Taylor:
Just look that up and you’ll find it on the internet. But again, it’s in our article as well. We’ve outlined what those Seven Deadly Sins are. Most people aren’t using the Delaware Statutory Trust for multifamily. But it might work well when you’ve got triple net leases and the tenants are in charge of making their own maintenance and repairs and you don’t have to worry about participating in those things.
Next question: “How do you build a thought leadership platform?”
Kim Lisa Taylor:
It’s such an ambiguous term. That term can mean so many different things to many different people. I think we need more information on what you’re really thinking about. I’m happy to have a call with you on that.
I guess if you think about a podcast, isn’t that a thought leadership platform? A podcast, putting together your own educational materials. I’d like to think that our website is a thought leadership platform.
He also wanted to know, “How do you think the multifamily syndication industry will be?”
Kim Lisa Taylor:
Well, I think that was the topic of this entire call. So I would say that maybe go back and listen again if you jumped on late, or check out that globest.com article. I just found that today. So I think you can look at that yourself. And there’s probably some other resources out there, if you do some Google searches on that and get some other people’s opinions in addition to my own. And what I tried to share with you today is really what I’ve been hearing as I’m talking to people who are actually experiencing it.
And I just wanted to share from the front lines what we’re hearing, because we talk to a number of different syndicators on a regular basis, people who’ve done it before, people who’ve never done it, people who have deals in all the different stages, people who are refinancing … So we’re hearing it maybe from a slightly different perspective than what you would on your own.
OK, our last question concerns CMBS loans and the difficulty of negotiating a deferral on those mortgage payments.
Kim Lisa Taylor:
Yeah, that is a problem. A lot of the CMBS loans have just dried up right now. And they’re probably going to be less interested in giving you some loan deferral or something like that. But I would still talk to them anyway. Because the last thing they want also is to have a whole bunch of people in default that can’t get out, and now they’ve got a bunch of non-performing loans. That’s not good for their investors, either.
So hopefully, if enough people start contacting them and saying, “We need you to help us out here,” then they will go to their shareholders and see if they can get them to realize the reality of the situation. But yeah, that’s always tough. With CMBS, they can make up whatever rules they want. And they often do. Whether you’re dealing with a government-backed loan, you have a little bit more protection, but this is such an unusual situation. I don’t think anybody could have anticipated it. And I think we’re all just trying to figure out how to get through it, both from our own personal side and getting through our own personal bills and things like that, but also from maintaining our businesses. And then the government is also trying to do its best to figure out how to deal with this and how to help people and keep itself going as well. So it’s a very unique situation all the way around.
All right. Well, I thank you so much, everybody, for joining the call today. We had a lot of participants on the call, so I really appreciate that. We’d love to hear from any of you. If you have questions, comments or any other way that we can help you, we’re happy to do so. And we wish you all the best and we’ll keep you apprised of new developments.
Thank you, everyone.
Kim Lisa Taylor: